Revival of European Infrastructure Expenditure
Since the 2009 financial crisis most developed countries have scaled back on infrastructure spending. Public infrastructure investments in OECD countries are running at about 30% below historic norm. Global investments in transport, power, water and telecom are currently USD2.5 trillion annually.
In order to meet current economic growth forecasts, level of investments should be USD3.3 trillion annually.1 There are significant and impactful infrastructure projects currently being implemented in Europe, Americas and Asia. In the January edition of Thematic Insights we will be looking at the ongoing megaprojects in Europe.
Europe has several megaprojects in transport infrastructure
Europe has a pipeline of over EUR110bn in mainly transport related major infrastructure projects which we expect to have a transformational effect on the surrounding economy. Pick-up in activity is supported by macroeconomic recovery leading to more fiscal headroom, low interest rate environment, PPP and concession activity picking-up and EU programs such as the Juncker Plan. The European Parliament and Council recently increased the Juncker plan to at least EUR500 billion by 2022. So far 607 projects worth EUR190bn have been approved. About half of the projects are infrastructure related.
In the European context tax rates are high and government expenditure is focused on current expenditure. A ‘good’ consolidation is one where taxes are lower and the lower government expenditure is on infrastructure […].
UK High Speed 2 rail (HS2)
The biggest project in Europe is the UK High Speed 2 rail (HS2), which will connect London to Birmingham in Phase One and to Manchester and Leeds in Phase Two. The estimated value of the project is GBP56bn. Phase One construction has already started and it should be operational in 2026. Phase Two construction is expected to start in 2025 and it is expected to be completed by 2033. HS2 will significantly shorten travel times, for example London – Manchester journey will take 1hr 8min instead of 2hr 8 min. It will also add seat capacity, trains will be up to 400m long and with as many as 1,100 seats per train. The Department for Transport says there will be almost 15,000 seats an hour on trains between London and Birmingham, Manchester and Leeds, tripling current capacity. The operating speed at 400kmh will be the fastest in Europe.3 The government estimates that 4.5 million journeys a year could be transferred from air and nine million from road to rail, reducing congestion on busy routes and bringing down greenhouse gas emissions.
“Grand Paris” in France ranks close second in terms of European infrastructure projects. The aim of the project is to connect Parisian suburbs to transport hubs and to create new economic growth centers outside the currently congested city center. It is a part of Paris’ pitch in global competition to attract private sector investments, such as company headquarters and R&D centers. The core of the plan is to build four new metro lines adding up to 200km of rail and 69 new stations. Two million passengers daily are expected to use the new network. The estimated budget is EUR25bn with additional EUR6-10bn of real estate investments. Société du Grand Paris expects a positive impact on job creation, increased tax collection, new housing units and less greenhouse gas emissions. In 2017 about EUR5bn worth of contracts have already been awarded. Traditionally French construction companies have had a high market share in the country, giving them a competitive edge. Main contractors for “Grand Paris” are the French infrastructure and construction companies Vinci, Eiffage and Bouygues. We have written more about “Grand Paris” in our Thematic Insight published in September 20174.
Heathrow third runway
The third megaproject is the widely discussed “Heathrow third runway” which finally got the government’s approval in September 2016 and recommendation from the Airports Commission in July 2017. The estimated capital expenditure is GBP17.3bn. The project will be fully privately funded with no subsidies from the public sector. Once completed in 2026 it will increase Heathrow’s capacity by 54%, as the number of permitted aircraft movements will increase to 740 0005. As Heathrow airport is fully regulated with RAB-model, investments in the runway will significantly grow the regulated asset base. Heathrow being located close to densely populated areas was a major reason why the process to approve the project took 17 years. The airport will be required to fund noise insulation for homes, schools and community facilities. It will also have a ban on night flights and strict limits on noise.
Due to Heathrow having only two runways it has operated at full capacity during the last years. This has led to other European hub airports attracting most of the growth in air travel. The Commission expects the new runway to strengthen long-haul and freight connectivity and to generate 120,000 new jobs by 20306. One of the aims of building a third runway is to be able to grow especially in emerging market connections, which is the driver for air traffic growth.
The 18km long Fehmarnbelt tunnel connecting Germany and Denmark will be the longest tunnel of its kind. The plan first surfaced in 1999 as a bridge, changing to a tunnel in 2009. The cost of the project is estimated to be EUR8bn. The tunnel is co-funded by the Danish government and the EU. Most major contracts have already been awarded for this technically challenging project. Among the winners have been the largest European infrastructure builders such as Vinci, Hochtief and BAM. The tunnel will be built from 89 large pre-cast concrete elements. The elements will be cast in a purpose built factory on the Danish side. After this the contractors will sail the hollow elements to the tunnel trench and immerse them into the tunnel trench under the seabed. The contractors will then cover the tunnel elements. The elements will be over 40 meters wide, 15 meters deep and 217 meters long. Each element weights 73,000 tones. It takes from one to three days to lower the tunnel element to its place as the accuracy has to be within 5 cm. New roads and railroads will be built to connect the tunnel with existing highways and railroads. Building time for the project is estimated to be 8.5 years. The tunnel will significantly improve the connectivity between Denmark and Germany. Cars will be able to drive at 110km/hour and trains will have a speed of 200km/h. This means that travel time from Denmark to Germany will be only ten minutes by car and seven minutes by train. Cars will save over one hour in travel time. As an example the journey from Copenhagen to Hamburg will take two and a half hours while currently it takes four and a half hours. Once operational, the link will be user financed, revenues from the link will be used to repay the construction loans7.
Additional projects in road construction
In addition to the above mentioned mega projects there is an unprecedented number of large road construction projects planned or in the bidding stage in Europe. Majority of the projects will be PPP (public, private partnership) financed and several have EU funding from for example the Juncker plan. Furthermore, as many European countries still suffer from high unemployment, governments are willing to spend money in infrastructure as investments have a high economic multiplier effect.
After a decade of underinvestment Europe is finally seeing a significant pick-up in infrastructure investments. However, much more needs to be done. European Investment Bank estimates that Europe must triple its current level of infrastructure investments in order to meet future demand and to stay competitive8. In order to meet this goal governments will need to attract private capital. Long term investors, like pension funds and sovereign wealth funds, would have capital and the right time horizon of over 10 - 15 years. However, due to infrastructure requiring high up-front investments and having a service life up to 100 years, the biggest risk remains changing regulation. Therefore when trying to attract private capital to invest into infrastructure, one of the main challenges for European countries remains how to guarantee a stable regulatory environment, which is not dependable on political changes.